Tight storage may lead to huge oil price drop

The Oil Drum: Europe ^ | 05/12/09 | Rune Likvern

[TigerLikesRooster]

Tight storage may lead to huge oil price drop

Posted by Rune Likvern on May 12, 2009 - 10:00am in The Oil Drum: Europe

Topic: Demand/Consumption

Tags: backwardation, china, china oil storage, contango, oecd, oil prices, original, tanker storage, us oil consumption, us oil storage [list all tags]

The present contango in oil prices bears all the hallmarks of an oil market where supplies are well above present fundamental physical consumption.

The recent large inventory build of petroleum, under a steep contango which now is flattening, within the big oil consumers (like the OECD countries and China) have left some with the expectation that major economies soon will begin to grow again, and that the contango now signals increased oil demand and higher oil prices in the future.

My analysis indicates that in recent months, as much as 2 -3 Mb/d of global petroleum supply has been used to build inventories. This is about to come to an end, because available storage is getting closer and closer to full and contango has begun to flatten. When additions to storage cease, the resulting drop in demand can be expected to lead to substantial downward pressure on oil prices.

[OB1kNOb]

I hope this guy is correct. BTW, can someone explain the term, contango?

[mom4melody]

We just bought a Suburban to haul our camper, so I am in agreement with you!

[pistolpetestoys]

When crude oil dropped below $40 a barrel,oil companies cut back on refining to keep the prices up;gas here in northern Illinois went up to 2.45/gal yesterday.I told my kids it will be over 3.00 by Fathers Day and well over 4.00 before Labor Day.I hope I’m wrong,but we’ve been down this road before.

[Paladin2]

Good, My tactical reserve may last for a longer period.

[Paladin2]

"Urkel Maobama"

Urkel, LOL, I hadn't seen that one before.

[netmilsmom]

We’re starting a trip next Friday. Home to Ohio, on to Hershey, PA then touring Philly.

We booked it early because we did a late trip fall of 2007 to Niagara falls and got killed in gas prices. Especially in Canada.

When one is paying more for gas than the rest of the trip, it’s almost worth it to stay in hotels (except the bedbugs, yuck)

[HonorInPa]

Contango - A condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity. opposite of backwardation.

[Paladin2]

Contango is when the price of the oil (or other commodities) some day in the future, in short often referred to as “futures”, is higher than the price of oil today. This offers market participants an incentive to buy oil today and store it for future use or sale.

Some participants buy oil contracts today, then turn around and sell them into the futures market. Using this approach makes it possible to pocket an almost no-risk profit. This also helps explain the 100 + Mb of oil and petroleum products presently stored on tankers waiting for deliveries.

[Paladin2]

One could also buy it now and burn it later, at a savings/profit.

[ZULU]

We KNOW you are right.

With Bush, the Oil Man's buddy, they knew they could rape us blind - and did.

With Obama, the Environ-Wacko, they know they can essentially do the same thing. Obama WANTS high prices so we use less energy. He thinks it will reduce "global warming climate change", leave more energy for his friends in third world ratholes, and punish America for its "evil" past, not to mention please the idiots on Move-on.org and their friends the environmental wackos.

[blasater1960]

Oh and might add that Hussein bows to his master, King of the house of Saud.

[pointsal]

That “Star” belongs to Hugo Chavez....

[GOPJ]

Thanks for the ping.

[Sawdring]

http://en.wikipedia.org/wiki/Anal_cancer

Hasn't the Sierra Club made a solar powered camper puller yet?

[1010RD]

In contango the price is lower in the future. I think you got it backwards. Normal backwardation is higher in the future than today’s spot price. That is why contango is unusual because it violates the normal risk/time trade off.

[Sawdring]

Excuse my cut and paste job. Was doing a little Farrah Fawcett research and thought I had copied your trailer sentence. LOL

[nascarnation]

Baraq’s fault.
Shout it to the housetops!

[Paladin2]

"I think you got it backwards"

I'm just quoting (cut and pasting) what I read. Call it whatever you want. It would seem to be an opportunity for temporal disintermediation to the extent that the price difference was above the combined cost of storage and the cost of money.

[1010RD]

How? If in contango, futures prices for a given maturity date are falling. In normal backwardation, futures are rising.

Wouldn’t that be buying high and selling low? Maybe Thackney can explain it.

I visit this site regularly and they’ve been discussing it this week: http://tonto.eia.doe.gov/dnav/pet/pet_pri_top.asp

[Paladin2]

"Contango is a term used in the futures market to describe an upward sloping forward curve (as in the normal yield curve). Such a forward curve is said to be "in contango" (or sometimes "contangoed"). Formally, it is the situation where, and the amount by which, the price of a commodity for future delivery is higher than the spot price, or a far future delivery price higher than a nearer future delivery. The opposite market condition to contango is known as backwardation. Contents [hide] * 1 Occurrence * 2 Origin of term * 3 References * 4 Other uses * 5 See also * 6 External links [edit] Occurrence A contango is normal for a non-perishable commodity which has a cost of carry. Such costs include warehousing fees and interest forgone on money tied up, less income from leasing out the commodity if possible (e.g. gold).[citation needed] The contango should not exceed the cost of carry, because producers and consumers can compare the futures contract price against the spot price plus storage, and choose the better one. Arbitrageurs can sell one and buy the other for a risk-free profit too (see rational pricing – futures). If there is a near-term shortage, the price comparison breaks down and contango may be reduced or perhaps even reverse altogether into a state called backwardation. In that state, near prices become higher than far (i.e., future) prices because consumers prefer to have the product sooner rather than later (see convenience yield), and because there are few holders who can make an arbitrage profit by selling the spot and buying back the future. A market that is steeply backwardated — i.e., one where there is a very steep premium for material available for immediate delivery — often indicates a perception of a current shortage in the underlying commodity. By the same token, a market that is deeply in contango may indicate a perception of a current supply surplus in the commodity."

You might want to do more research before calling people out.

You can apologize at any time. I'm waiting.